KPIs

Sustainable growth: Innovate, Grow, Acquire, Empower These details of Halma's Financial Key Performance Indicators are taken from the Halma plc Annual Report and Accounts 2016.

For information on non-financial Key Performance Indicators please see our Corporate Responsibility section.

 

 

Organic profit growth

Strategic focus

Through careful selection of our market niches and strategic investment in people development, international expansion and innovation we aim to achieve organic growth in excess of our blended market growth rate, broadly matching revenue and profit growth in the medium term. We buy companies with business and market characteristics similar to those of existing Halma operations. Acquired businesses have to be a good fit with our operating culture and strategy in addition to being value-enhancing financially.

Performance

3%

Target

≥5%

Organic profit growth % (constant currency)

Organic profit growth

KPI definition

Organic profit growth is calculated at constant currency and measures the change in profit achieved in the current year compared with the prior year from continuing Group operations. The effect of acquisitions and disposals made during the current or prior financial year has been eliminated.

Comment

Organic profit growth at constant currency was less than our target. Growth of 3.4% included strong performances in Environmental & Analysis, Infrastructure Safety and Medical sectors, with a decline in oil and gas markets adversely impacting Process Safety.

2017 target

The Board has established a long-term organic growth target of 5% p.a., slightly above the blended long-term average growth rate of our markets.

Remuneration linkage

Growth in organic profit is a key element of the economic value added performance which forms the basis of the annual bonus plan, requiring consistent annual and longer-term growth, rewarding disciplined financial performance.

Acquisition profit growth

Strategic focus

Through careful selection of our market niches and strategic investment in people development, international expansion and innovation we aim to achieve organic growth in excess of our blended market growth rate, broadly matching revenue and profit growth in the medium term. We buy companies with business and market characteristics similar to those of existing Halma operations. Acquired businesses have to be a good fit with our operating culture and strategy in addition to being value-enhancing financially.

Performance

8%

Target

≥5%

Acquisition profit growth %

Acquisition growth

KPI definition

Acquisition profit growth measures the annualised profit (net of financing costs) from acquisitions made in the year, measured at the date of acquisition, expressed as a percentage of prior year profit. Previously, the KPI was based on the annualised profit contributions from the current year’s and prior year’s acquisitions.

Comment

Acquisition profit exceeded our target of 5% for the year following a record spend of £193m on four acquisitions. 2016 was an excellent year for acquisitions, financed through our strong cash flow and increased debt facilities.

2017 target

Acquisitions must meet our demanding criteria and we continue to have a strong pipeline of opportunities to meet our 5% growth target.

Remuneration linkage

Growth in acquired profit is the second key element of the economic value added performance which forms the basis of the annual bonus plan, requiring consistent annual and longer-term growth, rewarding disciplined financial performance.

EPS growth

Strategic focus

The measure of how successful we are in growing our business organically and by acquisition coupled with strong financial disciplines, including those related to tax and capital allocation, is captured in the Group’s adjusted earnings per share.

Performance

10%

Target

≥10%

EPS growth % (adjusted earnings per share)

EPS growth

KPI definition

Adjusted earnings are calculated as earnings from continuing operations excluding the amortisation of acquired intangible assets; acquisition items; profit or loss on disposal of operations; the effects of closure to future benefit accrual of the defined benefit pension plans net of associated costs (2014 only); and associated tax thereon.

Comment

Performance was strong and met our target. Currency translation had a positive impact on the year’s result.

2017 target

We aim for the combination of organic and acquisition growth to exceed 10% per annum over the long term. The Directors consider that adjusted earnings represent a more consistent measure of underlying performance.

Remuneration linkage

EPS provides a clear link to the aims of the business growth strategy. It is a key financial driver for our business and provides a clear line of sight for our executives. EPS is 50% of the performance condition attaching to the Executive Share Plan introduced in 2015.

Organic revenue growth

Strategic focus

Through careful selection of our market niches and strategic investment in people development, international expansion and innovation we aim to achieve organic growth in excess of our blended market growth rate, broadly matching revenue and profit growth in the medium term.

Performance

6%

Target

≥5%

Organic revenue growth % (constant currency)

Organic revenue growth

KPI definition

Organic revenue growth is calculated at constant currency and measures the change in revenue achieved in the current year compared with the prior year from continuing Group operations. The effect of acquisitions and disposals made during the current or prior financial year has been eliminated.

Comment

Organic growth at constant currency in revenue exceeded our target with growth in three sectors and all major geographic regions.

2017 target

The Board has established a long-term minimum organic growth target of 5% p.a., slightly above the blended long-term average growth rate of our markets.

Remuneration linkage

Organic growth in revenue contributes to the economic value added performance which forms the basis of the annual bonus plan, requiring consistent annual and longer-term growth, rewarding disciplined financial performance.

Return on Sales

Strategic focus

We choose to operate in markets which are capable of delivering high returns. The ability to maintain these returns is a result of maintaining strong market and product positions sustained by continuing product and process innovation.

Performance

20.6%

Target

≥18%

Return on Sales %

Return on Sales

KPI definition

Return on Sales is defined as adjusted profit before taxation from continuing operations expressed as a percentage of revenue from continuing operations.

Comment

Return on Sales was well above target. Environmental & Analysis increased Return on Sales above 18%. Infrastructure Safety and Medical sustained a strong performance. Process Safety demonstrated its resilience despite tough market conditions.

2017 target

We aim to achieve a Return on Sales within the 18% to 22% range while continuing to deliver profit growth.

Remuneration linkage

Return on Sales is a measure of the value our customers place on our products and of our operational efficiency. High profitability supports the generation of high economic value.

ROTIC (Return on Total Invested Capital)

Strategic focus

We choose to operate in markets which are capable of delivering high returns. The ability to maintain these returns is a result of maintaining strong market and product positions sustained by continuing product and process innovation.

Performance

15.6%

Target

≥12%

ROTIC % (Return on Total Invested Capital)

Return on Total Invested Capital

KPI definition

ROTIC is defined as the post-tax return from continuing operations before amortisation of acquired intangible assets; acquisition items; profit or loss on disposal of operations; and the effects of closure to future benefit accrual of the defined benefit pension plans net of associated costs (2014 only) as a percentage of average shareholders’ funds.

Comment

Consistently high returns are in excess of our long-term Weighted Average Cost of Capital (WACC) of 8.1% (2015: 7.6%). In the year this KPI was adversely affected by the strength of the US Dollar increasing the Sterling value of goodwill and intangible assets on the Consolidated Balance Sheet.

2017 target

A range of 12% to 17% is considered representative of the Board’s expectations over the long term to ensure a good balance between growth and returns.

Remuneration linkage

ROTIC performance, averaged over three financial years, is 50% of the performance condition attaching to the Company’s Performance Share Plan and the 2015 Executive Share Plan.

Cash generation

Strategic focus

Strong cash generation provides the Group with freedom to pursue its strategic goals of organic growth, acquisitions and progressive dividends without becoming highly-leveraged.

Performance

86%

Target

≥85%

Cash generation

Cash generation

KPI definition

Cash generation is calculated using adjusted operating cash flow as a percentage of adjusted operating profit.

Comment

Cash generation of 86% (2015: 87%) was in excess of the 85% target in the current year with strong cash performances across the Group.

2017 target

The goal of Group cash inflow exceeding 85% of profit is a metric that has relevance at all levels of the organisation and aligns management action with Group needs. We ensure that strong internal cash flow and availability of external funding underpin our strategic goals of organic growth, acquisitions and progressive dividends.

International revenue growth

Strategic focus

The safety, health and environmental markets in Asia and other developing regions are evolving quickly. We continue to invest in establishing local selling, technical and manufacturing resources to meet this current and future need.

Performance

7%

Target

≥10%

International revenue growth %

International revenue growth

KPI definition

Total sales to markets outside the UK, USA and Mainland Europe compared with the prior year. This KPI replaces the previous International Expansion KPI which measured these sales as a percentage of total Group revenue.

Comment

Revenue outside the UK, USA and Mainland Europe increased by 7% which is below the KPI target with strong growth in developed markets. Good progress was made in Asia Pacific and Africa, Near and Middle East but tough economic conditions and a major contract to South America in the prior year contributed to declining revenue there.

2017 target

The emphasis on international revenue growth at twice the rate of overall organic growth reinforces the importance of emerging markets and our strategy of establishing operations close to our end markets.

Research and development

Strategic focus

We have maintained high levels of R&D investment and spending on innovation. The successful introduction of new products is a key contributor to the Group’s ability to build competitive advantage and grow organically and internationally.

Performance

5.1%

Target

≥4%

Research and development

Research and development

KPI definition

Total research and development expenditure in the financial year (both that expensed and capitalised) as a percentage of revenue from continuing operations.

Comment

Total spend in the year increased significantly by 19% to £41.2m (2015: £34.6m) and as a percentage of revenue increased to 5.1%. All sectors increased R&D expenditure, in particular, Medical.

2017 target

New products contribute strongly to organic growth, maintaining high returns and building strong market positions. The 4% minimum investment target is appropriate to the mix of product life cycles and technologies within Halma.